BY LILIAN CO
June was yet another up month for the local bourse. The MSCI China index climbed 1.5%, making a half year return of 23.7%. Continuous inflow from southbound funds remained the major buying force pushing the market up. The A-share market finally played catch up with the CSI 300 (up 5%), in anticipation of the inclusion of A-shares into MSCI indices.
The US rate hike was a non-event, since it had been well flagged. In fact, the patchy macro data in the US had made investors less worried about aggressive rate hikes in the coming quarters. Year-to-date winning sectors such as auto, technology and internet remained the market darlings. Insurance stocks also outperformed on a rising yield curve. Technology stocks had a strong come back after the sell-off in May.
Both, strong share price performance of AAC Technologies after stock resumption and strong shipping figures from peers, had restored market confidence in the sector. The Investment Adviser expects the tech sector to keep doing well in the run up to the launch of the iPhone 8 later this year and will look to take profit if share prices overshoot.
The inclusion of A-Shares into the MSCI emerging markets index was finally confirmed in late June. The inclusion will be effective from June 2018, with an initial country weight of 0.73% based on a 5% inclusion factor. The weighting would increase to 18.8% based on a 100% inclusion factor. The Investment Adviser however thinks that it will take many years before the inclusion factor will be raised to 100%. The Portfolio Manager believes that the inclusion in the MSCI should be viewed as a big milestone for the A-share market, as it will attract more funds from global investors over time. Currently, the Fund has no exposure to A-shares in the portfolio. The Investment Adviser will however revisit the investment case given the stabilizing Renminbi.
The Fund was up 5.3% in June, ending the half year with a return of 31.2%. The Fund outperformed the benchmark by 3.8% in June, reversing the underperformance in the previous month thanks to the recovery of technology stocks (34.2% in the portfolio) and the contribution from downstream gas operators (3.4% in the portfolio), which the Investment Adviser added due to their weakness in the previous month. These two sectors alone added 3.2% and 0.8% to the monthly performance respectively.The Investment Adviser added Macau gaming stocks to the portfolio once again, due to stronger than expected gaming revenue growth.
The Investment Adviser is surprised by the resilience of the market given the hefty index gain year-to-date. According to her assessment, a market P/E at 13.6x 2017 is by no means expensive compared to other major markets. Overall, the Investment Adviser’s positive view has not changed.
The views and statements contained herein are those of the LBN Advisers Limited in their capacity as Investment Advisers to the Fund as of 17/07/2017 and are based on internal research and modelling.